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PPP Guidance for Schedule C Self-Employed Individuals

Author: Harmony Kolling, CPA

Please click here for guidance regarding the PPP loan eligibility and forgiveness provisions for those with Schedule C income.

Some items to note:

  • Schedule C filers who were in business as of 2/15/2020, with SE income are eligible for a PPP loan if their principle place of residence is the U.S. and they have filed or will file a 2019 Form 1040 with a Schedule C.
  • Calculation of the eligible loan amount for those WITHOUT employees will be based on the 2019 Schedule C, Line 31 (net profit/SE Income). If you haven’t yet filed a 2019 Schedule C, one must be completed (but not necessarily filed) for the calculation.
  • If the amount of line 31 is more than $100,000, reduce it to $100,000.
  • If the amount of line 31 is zero or less – you are not eligible
  • Take the lesser of $100,000 or the amount from line 31 (unless that amount is negative) and divide that by 12 to obtain the average monthly net profit amount. Then multiply that average monthly net profit amount by 2.5.
  • Add any outstanding amount of the EIDL loan made between 1/31/20 and 4/3/2020 that you seek to refinance, less the amount of any advance made from that EIDL loan (as that does not need to be repaid).
  • Substantiation needed for the loan includes a 2019 Schedule C (filed or unfiled), 2019 1099-MISC detailing NEC (Box 7) income, invoices, bank statements, or book of records that establish that you are self-employed. Additionally, 2020 invoices, bank statement or book of records need to be submitted to establish you were still in business as of 2/15/2020.
  • Calculation of the eligible loan amount for those WITH employees is calculated as follows:
    – If the amount of line 31 is more than $100,000, reduce it to $100,000.
    – If the amount of line 31 is zero or less – set this amount at zero.
    – Calculate 2019 gross wages and tips paid to your U.S. employees using 2019 IRS Form 941s (Line 5c-Column 1 – Medicare Wages) from each quarter PLUS any pre-tax employee contributions for health insurance or other fringe benefits excluded from taxable Medicare wages. Subtract out any amounts paid to any employee in excess of $100,000.
  • Calculate any 2019 employer health insurance contributions (Schedule C line 14), retirement contributions (Schedule C line 19), and any employer state and local taxes on compensation.
    * Add your Schedule C net profit amount (with restrictions in the first 2 bullet points), plus the 2019 gross wage calculation and 2019 benefit calculation (in the previous two bullet points). Calculate the average monthly amount of this total by dividing it by 12. Then multiply that number by 2.5.
  • Add any outstanding amount of the EIDL loan made between 1/31/20 and 4/3/2020 that you seek to refinance, less the amount of any advance made from that EIDL loan (as that does not need to be repaid).
  • Substantiation needed for the loan include the 2019 Schedule C, and a 2019 1099-MISC detailing NEC (Box 7) income, invoices, bank statements, or book of records that establish that you are self-employed. Additionally, 2020 invoices, bank statement or book of records need to be submitted to establish you were still in business as of 2/15/2020. Additionally, you must supply copies of your Form 941s, and evidence of your retirement and health insurance contributions if applicable. Additionally, you need to provide a payroll statement or other documentation that shows that you had employees and were in business as of 2/15/2020.
  • Proceeds of the PPP loans for Schedule C filers can be used for owner compensation replacement (based on 2019 net profit from Schedule C), payroll costs, mortgage interest payments (which seems to include interest on business auto loans too), business rent payments, and business utility payments. However you must have claimed or be entitled to claim a deduction for such expenses on your 2019 Schedule C for them to be a permissible use during the 8 week measurement period. Also included as permissible costs are interest payments on other debt obligations that were incurred prior to 2/15/20, and for refinancing a EIDL loan made between 1/31/20 and 4/3/20.
  • 2020 expenses may not be considered for the calculation of this loan (for those in business in 2019 and who filed or will file a 2019 Schedule C), due to the lack of verifiable documentation on expenses during that period. MORE GUIDANCE will need to be used for those self-employed in 2020 and not for 2019.
  • For the loan forgiveness the amount of the following expenses during the 8 week measurement period will be considered:
  • Payroll costs up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits (health/retirement) for employees (but not owners)
  • Owners compensation replacement, calculated on 2019 net profit; with forgiveness limited to eight weeks’ worth (8/52) of 2019 net profit. Excludes any FFCRA qualified sick leave equivalent amount or qualified family leave amount for which a credit is taken.
  • Interest on mortgage obligation on real or personal property (on loans made on or prior to 2/15/20), to the extent they are deductible on Schedule C,
  • Rent payments on lease agreements in force before 2/15/20, to the extent they are deductible on Schedule C,
  • Utility payments under service agreement dated before 2/15/20 to the extent they are deductible on Schedule C
  • The 75% limitation of the loan forgiveness being used for certain purposes also applies here – however it seems that the payroll costs, owners compensation replacement and any EIDL loan refinancing are part of the 75% calculation.

Other items to note:

  • This guidance does make reference to partnerships (including LLC partnerships) and that the partnerships themselves must apply for the PPP loans and NOT the partners on an individual level. Self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on half of the partnership.
  • SCHEDULE F guidance is NOT included anywhere in this document. This interim final rule specifically uses Schedule C only in the instructions.

Harmony Kolling

Shareholder
harmony.kolling@bradymartz.com
701-483-6000
Dickinson, ND

Scott Hasbrouck

Shareholder
scott.hasbrouck@bradymartz.com
701-775-4685
Grand Forks, ND

Dan Macintosh

Senior Manager
dan.macintosh@bradymartz.com
701-280-2100
Fargo, ND